Global dynamics; State implications
Despite market relief from a pullback of US ‘reciprocal’ tariffs, Australia’s two largest trading partners are on a collision course.
After announcing ‘reciprocal’ tariffs on most of the world on the 2nd of April, the US has now announced a 90 day pause for all nations except China as tensions between the two countries escalate. China faces an import tariff of 145%, and the US faces retaliatory tariffs of 125%, with Chinese officials vowing to “fight to the end".
Over the weekend, the US announced a temporary tariff exemption for popular electronics while the administration is “taking a look” into an electronics sectoral tariff. This news is welcome for US companies like Apple, who rely on Chinese manufacturing for a large share of their production.
The Chinese economy has been slowing facing structural challenges and weak domestic demand. As tensions with the US escalate, China’s economy could slow further and result in weaker demand for Australia’s exports, dominated by resources and energy products. Weakening Chinese demand for commodity exports is likely to dampen economic growth, particularly in Western Australia, Queensland and the Northern Territory, due to these jurisdictions’ reliance on commodity exports.
Declining commodity prices provide a signal of concern. As of 15-April, the price of coal is $US94.85 per tonne, down 6.5% from a month ago. Although the price of iron ore has not moved much since ‘Liberation Day’, the Australian Financial Review reports that investors believe that the iron ore price may drop to about $US80 per tonne from the current $US100 per tonne.
That’s bad news for Australian national income. The good of news is that current monetary policy, which is generally seen as restrictive, can be loosened to support the Australian economy. An average Australian mortgage holder stands to save approximately $1,250 annually should the RBA cut rates by 25 basis points. With the market now expecting four 25bp rate cuts in the next 12 months, the Australian mortgage belt, comprising our largest cities like Sydney, Melbourne and South-East Queensland, are likely to see a lift in spending and sentiment.
Over the year to December 2024, the ACT is estimated to have led the nation in GSP growth (+3.0%), but election uncertainties and a potential public service downsize poses downside risk. Most other states recorded modest growth at around the national average of 1.0%, while the NT is estimated to have contracted (–4.5%). However, business investment in the NT (+13.0%) is the strongest in the nation, with resource companies’ spending on petroleum exploration reaching its highest level since mid-2014 as final construction works on the Barossa gas project are completed.
Government investment grew strongly in WA, increasing 17.6%, well ahead of the national average growth of 3.9%, with a strong public investment agenda underway.
Looking ahead, falling interest rates are expected to be a support for business investment in the latter half of 2025, lifting economic growth in both New South Wales and Victoria.
Housing investment presents a modest picture nationally, with overall spend down 0.4% over the past year. Victoria, SA and WA are punching ahead of the national average at present. Arguably all jurisdictions have work to do in the coming years in what has become the battleground issue of the Federal election.
The biggest potential improvement to the very mediocre set of economic statistics presented in Table 1 is to consumer spending. At present Queensland, WA and the NT are leading the way with population inflows and healthy commodity incomes supporting ability to spend. However, commodity-exporting states may face greater headwinds. Softer global demand and ongoing trade uncertainty are expected to weigh more heavily on growth in these jurisdictions.
Interest rate cuts on the other hand, while providing relief to mortgage holders across the board, may drive a higher uplift in consumer spending in Sydney and Melbourne, given higher mortgage sizes on average.
This newsletter was distributed on 15th April 2025.For any questions/comments on this week's newsletter, please contact our authors:
This blog was co-authored by Reid Quekett, Economist at Deloitte Access Economics
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